ABSTRACT: Cartels are inherently instable. Each cartelist is best off if it
breaks the cartel, while the remaining firms remain loyal. If firms
interact only once, if products are homogenous, if firms compete in
price, and if marginal cost is constant, theory even predicts that
strategic interaction forces firms to set the market clearing price.
For society, this would be welcome news. Without antitrust
intervention, the market outcome maximises welfare. The argument
becomes even stronger if the opposite market side has a chance to
defend itself; if imposing harm on the opposite market side is salient;
if it is clear that cartels are at variance with normative expectations
prevalent in society. There is an equally long list of reasons, though,
why such optimism might be unwarranted: capacity is limited;
interaction is repeated, and the end is uncertain; firms might be
willing to run a limited risk of being exploited by their competitors,
hoping that the investment pays. This paper explores the question both
theoretically and experimentally. In the interest of capitalising on a
rich body of experimental findings, and on the concept of conditional
cooperation in particular, the paper offers a formal model that
interprets oligopoly as a linear public good.